Friday, September 26, 2008

Oilonomics 201

There seems to be this persistent theme in the energy policy and fuel economy debate that we need to be independent of "foreign oil". In his latest column, for example, John McElroy writes about ways to reduce our use of "Pesian Gulf" oil.

This is really an emotional play, to get people worked up about the issue. There is no such thing as "Persian Gulf" oil, in terms of public policy.

Oil is a commodity, which is traded on commodities markets worldwide. Traders buy and sell contracts, and customers who actually want oil arrange delivery via tanker and pipeline.

The "middle eastern oil" label implies that if we could just reduce our consumption by a few million barrels a day, we could bankrupt the Saudis (a worthy goal) while keeping our Canadian and Mexican friends in business. But really, what would happen, is that we would drive down the global price of oil. The Saudis wouldn't starve, but they would make less profit, as would the Canadians, Russians, and Nigerians.

An unintended side effect of reducing our use of oil would be to make it cheaper for the Chinese and Indians to burn more of it--so from a global warming point of view, reducing our oil consumption may not have that big of an impact if the developing world picks up the slack.

3 comments:

"The Saudis wouldn't starve, but they would make less profit, as would the Canadians, Russians, and Nigerians."

True - but the Saudis have nothing else to sell unlike the Canadians, Russians, etc. and they are too lazy to make anything useful the world wants (if the last statement is untrue, why is the country run by Pakistanis, Filipinos, etc.). To the extent the U.S. obtains non domestic oil from Canada and Mexico, the better it is able to tell the Saudis (and Venezuelans) to piss on an electric rail next time they cause trouble.

Thinking about the level of understanding Big Media seems to have of the oil market I'd say if you were addressing "journalists" at places like CNN, NPR, et al you should label this post "Oilonomics 575 Capstone".